Fortune Brands Reports Second Quarter Results

25 July 2008 - Fortune Brands, Inc., the company behind leading consumer brands including Jim Beam, Titleist and Moen, today reported results for the second quarter of 2008.

Earnings per share before charges/gains were at the high end of the company’s recently updated target range. Higher shipments of spirits brands in the U.S. and strong growth in Asian markets for the company’s golf and home products brands partly offset the adverse impact of the ongoing correction in the U.S. housing market, the softening consumer environment in the U.S., higher commodities costs, and the unanticipated Australian excise tax increase on ready-to-drink spirits products.

Reported results reflected the impact of one-time items amounting to a net after-tax charge of $60 million. The one-time items include a non-cash write-down of goodwill and identifiable intangibles related to the impact of the U.S. housing correction primarily on the company’s door brands, a non-cash write-down of the company’s investment in the Maxxium international joint venture related to the forthcoming exit of Rémy Cointreau, and restructuring and restructuring-related charges in the home products and spirits units. These items were partly offset by credits related to the favorable resolution of IRS tax matters and a gain related to the repurchase of the minority interest in the company’s spirits business previously held by V&S Group.

“While we faced a tougher-than-expected environment in the second quarter, we remain intensely focused on two objectives – outperforming our product categories, and investing for the future to drive sustainable long-term growth and returns,” said Bruce Carbonari, president and chief executive officer of Fortune Brands. “We’re benefiting from proactive cost reductions, productivity improvements and share-gain initiatives in our home products business, where we’ve eliminated 25% of facilities while maintaining supply-chain flexibility and strategic spend. We’re continuing to build a high-performance organization behind our spirits brands, and we’re investing to creatively build premium brand equity to grow revenues faster than case volumes. And we’re investing to grow our golf brands through innovation and expansion in promising international markets. We believe that these are the right moves to create long-term value for our shareholders.

“The action plans we’re pursuing benefited Fortune Brands in the second quarter,” Carbonari added. “While our double-digit increase in brand-building investments and the Australia RTD tax increase adversely impacted operating income in our spirits business, we drove solid revenue and volume growth for several key premium spirits brands in the U.S. We also benefited from the anticipated rebuilding of U.S. spirits distributor inventories. Despite a U.S. housing correction that has intensified, we continued outperforming the home products market on the success of our share-gain initiatives, while achieving expected savings from our proactive cost initiatives. And our international growth initiatives helped drive double-digit growth for our golf brands in key Asian markets, partly offsetting the impact of a double-digit increase in brand investment and the soft consumer environment in the U.S.”

For the second quarter of 2008:

• Net income was $136.0 million, or $0.88 per diluted share, versus $1.48 per share in the year-ago quarter.

• Excluding one-time items in both the current and prior-year periods, diluted EPS before charges/gains for continuing operations was $1.25, down 17% from $1.51 in the year-ago quarter.

• Net sales from continuing operations were $2.1 billion, down 9%.

• Operating income was a loss of $16 million, and was positive $325 million on a before charges/gains basis.
• Return on equity before charges/gains was 13%.
• Return on invested capital before charges/gains was 8%.

Returning Value to Shareholders: Dividend Increase and Share Buybacks

The company also announced that its board of directors has approved a 5% increase in the dividend on the company’s common stock. The dividend will increase 8 cents per share to an annual rate of $1.76 (payable $0.44 per quarter) from $1.68 per share ($0.42 per quarter). The next quarterly dividend is payable on September 2, 2008 to shareholders of record at the close of business August 13, 2008.

Furthermore, the company disclosed that it has repurchased more than 4.3 million shares of its common stock since implementing on March 31^st an authorization to repurchase up to 15 million shares.

“In addition to our focus on sustainable long-term growth, we’re also committed to putting our financial flexibility to work to return immediate value to shareholders,” Carbonari continued. “This dividend increase underscores the strength of our balance sheet and our confidence in Fortune Brands’ ability to deliver strong results over the long term. Notably, this is the 12^th year in a row we’ve increased the dividend since the company began trading as Fortune Brands, and our dividend currently offers a yield of approximately 3%. We also see our share price as an extremely attractive high-return opportunity, and we’ve moved aggressively to repurchase shares of Fortune Brands to create additional value for shareholders.”

The company also declared a regular dividend of 66.75 cents per share on the $2.67 Convertible Preferred Stock, payable in cash on September 10, 2008 to shareholders of record at the close of business August 13, 2008.

Company Repurchases Minority Interest in Spirits Business

The company further announced that it has completed the repurchase of the equity minority interest in its Beam Global spirits business previously held by V&S Group. The company’s partnership agreement with V&S provided for a third-party evaluator to determine the sale price of the minority interest. An independent evaluator established $455 million plus accrued dividends as the price to repurchase the preferred shares, which, as previously disclosed, could not be sold to another company and had unique shareholder rights as a preferred security.

“The price established for the repurchase of the equity minority interest is good news for our shareholders, and reflects the unique features of the preferred shares held by V&S as well as the debt structure of Beam Global,” Carbonari said. “Because this valuation was below the $543 million value we carry on our books, we have recorded a gain in our second quarter results. With this transaction now complete, we look forward to benefiting from the entire financial performance of our highest profit business.”

Outlook for Third Quarter and Full Year

“As we look to the back half of the year, we’ll continue to focus on outperforming our markets and ensuring a strong foundation for sustainable long-term growth,” said Carbonari. “While we’ll still face the headwinds of an intensified U.S. housing correction, the weakness in U.S. consumer confidence and the Australian ready-to-drink tax increase, we expect to benefit from share gains, growth in international markets, our position in the relatively stable premium spirits market, annualization of our stepped-up brand investments in spirits and golf, and company-wide productivity initiatives and cost controls.

“For the third quarter, we’re targeting diluted EPS before charges/gains to be down at a mid-teens-to-mid-20s percentage rate compared to $1.34 in the year-ago quarter. For the full year, we continue to expect diluted EPS before charges/gains to be down at a high-single-digit-to-high-teens percentage rate compared to $5.06 in 2007,” Carbonari concluded.

The company also announced that it is now targeting free cash flow for 2008, after dividends and capital expenditures, to approximate $500 million.